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Macro Monkey

“By trying often the monkey learns to jump from the tree.”
-African Proverb
At this point, understanding what’s driving assets priced in Burning Bucks isn’t that difficult. The US Dollar was down -0.7% yesterday, leading the SP500 up +2.3%. Oil up, Gold up, Financials up. Monkeys jumping all over one another as they figured out they were all short the 50-day Monkey Moving Average.
Inverse correlations like this won’t last forever, but it will definitely last into this month-end. High R-Squares in Global Macro are never perpetual. But, for now, all of the monkeys are really learning how to jump from the trees.
I use the 50 and 200-day moving averages as behavioral tools. Other people use them as a driver of their risk management process. I wonder if they have done the math on how crowded that is. Using a one-factor model (a simple moving average) is something that I expect my son Jack to be able to do once I show him where to hit the button on Yahoo Finance.
I realize that we’re all just a bunch of monkeys trying to prove that we deserve compensation to opine on markets, but let’s get real here and at least try to evolve. Monkeys yelling “yo, bro – that chart is breaking down dude” is embarrassing. The Chinese watch CNBC’s Fast Money. I can’t imagine what they must be thinking.
Actually, I can. The Chinese are a net seller of everything US Dollar exposure and a buyer of other currencies, gold, etc. China and Japan are diversifying away from what we have been YouTubed as – a conflicted and compromised financial system. America is no longer trusted as the world’s financial fiduciary.
I received a lot of emails yesterday about why the US Dollar was going down. For the better part of this week, Howard Penney and I have been issuing thoughts on what could make the Bombed Out Buck go up, so I think these questions are both well-timed and well-placed. As we have learned this week, what the US Dollar does is the lead indicator for the Fed’s next move.
Why was the US Dollar Down yesterday?
1.      Timmy Geithner speaking – that’s the Credibility Cross that the American Financial System still has to bear. I’ll let you watch the YouTube yourself.

2.      President Obama speaking – right after the non-Great Depressionista GDP report of +3.5% was released, he came out and talked down the number.

There is no credibility in a currency that is backed by conflict of interest. Whether it’s Geithner telling you that US banks are “not too big to fail” or Obama telling you that you better get cozy with an “emergency” rate of ZERO percent on your hard earned savings accounts, it’s all the same thing. It’s just wrong. Americans don’t buy it, and neither do our Chinese Creditors.

Newsflash for CNBC: markets don’t trade on lagging GDP reports. They trade on future expectations.
With the US Dollar breaking down through my immediate term TRADE line of $76.20 yesterday, you saw the power associated with a multi-factor macro model. You can say that it doesn’t work, and you can say that Obama and Geithner are right too - but, if you say that, Mr. Macro Market is voting on the other side of you. Market prices don’t lie; people do.
The Buck is Burning again this morning (down to $75.88) because the 2 aforementioned political statements reminded those who are looking forward to next week’s FOMC decision that there is an explicit message from Bernanke’s boss to not signal a rate hike.
Message from Obama: Get back to your Depressionista history books Benny and start getting beared up again – there is no time for you to be doing math right now. It’s all about revisionist history and keeping rates at ZERO for an “exceptional” period of time. With Healthcare and Afghanistan, I don’t have time to deal with the house of cards that Robert Rubin built. Not now.
Unfortunately, President Obama, markets wait for no one – not even you. Norway raised rates this week and India and China are signaling sobriety now too. As the world moves toward the Australian interpretation of non-Great Depression math, they’ll be moving away from the compromised rates of return you are signing off on.
My immediate term TRADE lines of support and resistance for the SP500 are now 1042 and 1075, respectively. If Bernanke panders again next week, Burning the Buck further from here, and 1066 in the SP500 holds, we could see a final 2009 crescendo of clanging Macro Monkeys like me take the SP500 to higher-highs at 1109. People hate this rally, and they probably hate the idea of that happening too.
The alternative, President Obama, is to have Bernanke signal what he should have a month ago. Yes, you’ll have to take your medicine and see the stock market drop like it did in 4 out of the last 5 days. But medicine is what this sick monkey called the US Financial System desperately needs. A reflated stock market hasn’t helped your approval ratings anyway, so you may as well get on with it.
Have a solid weekend with your families. Best of luck out there today,



EWZ – iShares Brazil
President Lula da Silva is the most economically effective of the populist Latin American leaders; on his watch policy makers have kept inflation at bay with a high rate policy and serviced debt –leading to an investment grade credit rating. Brazil has managed its interest rate to promote stimulus. Brazil is a major producer of commodities. We believe the country’s profile matches up well with our reflation call.

EWT – iShares Taiwan With the introduction of “Panda Diplomacy” Taiwan has found itself growing closer to mainland China. Although the politics remain awkward, the business opportunities are massive and the private sector, now almost fully emerged from state dominance, has rushed to both service “the client” and to make capital investments there.  With an export industry base heavily weighted towards technology and communications equipment, Taiwanese companies are in the right place at the right time to catch the wave of increased consumer spending spurred by Beijing’s massive stimulus package.

XLU – SPDR Utilities
We bought low beta Utilities on discount (down 1%) on 10/20. Bearish TRADE, Bullish TREND.

FXC – CurrencyShares Canadian Dollar We bought the Canadian Dollar on a big pullback on 10/20 and again on 10/28. The TREND and TAIL lines for the Canadian Dollar remain bullish.

EWG – iShares Germany Chancellor Angela Merkel won reelection with her pro-business coalition partners the Free Democrats. We expect to see continued leadership from her team with a focus on economic growth, including tax cuts. We believe that Germany’s powerful manufacturing capacity remains a primary structural advantage; with fundamentals improving in a low CPI/interest rate environment, we expect slow but steady economic improvement from Europe’s largest economy.

GLD – SPDR Gold We bought back our long standing bullish position on gold on a down day on 9/14 with the threat of US centric stagflation heightening.   


XLV – SPDR Healthcare We’re finally getting the correction we’ve been calling for in Healthcare. We like defensible growth with an M&A tailwind. Our Healthcare sector head Tom Tobin remains bullish on fading the “public plan” at a price.

CYB – WisdomTree Dreyfus Chinese Yuan
The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP – iShares TIPS
The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

EWJ – iShares Japan While a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

UUP – PowerShares US Dollar We re-shorted the US Dollar on strength on 10/20. It remains broken across all 3 investment durations and there is no government plan to support it.

FXB – CurrencyShares British Pound Sterling
The Pound is the only major currency that looks remotely as precarious as the US Dollar. We shorted the Pound into strength on 10/16.


SHY – iShares 1-3 Year Treasury Bonds  If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.


The Macau Metro Monitor. October 30th, 2009.





Las Vegas Sands Corp. has won approval from the Hong Kong stock exchange to list shares of the company’s Macau operations.  LVS can now move forward with the Hong Kong IPO which is expected to raise US$2 billion or more to help the company pay off its massive debt and revive their construction plans on Cotai.  The company is seeking a further US$2 billion in financing ahead of the offering.  Potential lenders are biding their time but LVS, ideally, would want the financing before the IPO to reassure investors and earn a better valuation.  The high levels of debt and skepticism over the “fickleness” of regulatory bodies in China have negatively impacted the company’s valuation.




GALAXY LAND DEAL SIMMERS destination-macau.com

Following the controversy surrounding the government’s decision to allow Galaxy to transfer the tenancy rights for their Cotai property to a third party while it is being developed, some local lawmakers have done a comparable survey of land values in Fai Chi Kei, near the border with Zhuhai.  They believe that the same-sized piece of land as Galaxy’s there is worth around MOP 175 billion.  Fai Chi Kei allows for the building and sale of residential units, whereas Cotai has been – up until now at least – an area where people are supposed to work rather than live. 




eSUN SUES NEW COTAI destination-macau.com

The Macau Studio City dispute is coming to a head. eSun Holdings, owned by Jack Lam, is suing New Cotai LLC, run by David Friedman, for HK$17 billion.  The bulk of the claim, HK$16.6 billion, is for “inducing or procuring breaches of fiduciary duties”.  HK$689 million is being sought for breaches in their sales and purchase agreement. 




AN APPLE A DAY KEEPS THE DOCTORS… destination-macau.com

The Apple Daily has quoted a “source” as saying that the Ho family is considering suing the doctors that have been taking care of Stanley Ho.  This “source” claims that the patient has never regained consciousness since undergoing brain surgery three months ago.  DM believes it would be quite likely that the Ho family could now sue Apple Daily, since the implication of the report is that they have been lying to the media about their father’s health.


Blow out quarter in Macau vs. low hold in LVS. The bulls will win this debate. 



LVS posted a huge quarter in Macau, beating our EBITDA projections which were already well above the Street.  The only "incremental" negative was an extremely low hold percentage in Las Vegas.  I use the term incremental because we still have issues with Las Vegas and are not so optimistic about 2010 as LVS management seemed on their conference call.  However, Macau will and should dominate the discussion and, until the massive table supply kicks in, near-term momentum remains.  Over $500 million in annual cost savings is not too shabby either.


Since consensus was only $133 million, the Street was probably surprised by the $150 million in EBITDA generated at the Venetian Macau during the quarter.  We were not - we projected $147 million - but Sands Macau did surprise us, beating our estimate of $65 million by $13 million.  Fixed cost reduction remains a story at both properties. By our math, Venetian Macau reduced fixed expenses by $16 million year over year and are on an annual run rate of $300 million in total fixed expenses at the property.  At Sands Macau, we estimate that fixed costs declined a whopping 57% and drove most of the variance from our EBITDA estimate.


In Las Vegas, EBITDA was a paltry $34 million.  We estimate the number should've been $65-70 million if not for a horrendously low table hold percentage of 12.2% - but still below our $75 million estimate.  Management was very excited about the group segment where there is more business on the books for 2010 already than was recorded for all of 2009.  This is a big positive but the enthusiasm must be tempered somewhat.  LVS is going off of a very easy comparison into the seasonally strongest convention quarter of the year with 3k more hotel rooms (Palazzo).  We are very encouraged by the cost cutting - 18% or $40 million y-o-y per our estimate.  Q4 EBITDA could surprise on the upside.


LVS looks to be in good shape for the remainder of the year and incremental catalysts are positive.  Just make sure to check your share counts.  When profitability returns in Q4, fully diluted shares should total around 815 million shares and not the 660 million shares recorded in the Q3 per share loss calculation.  Much of the sell side doesn't seem to have this right.

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BYI makes FQ1 on lower SG&A. Not a high quality quarter but not that important either. We continue to be bullish on Q4 and the long-term and, indeed, guidance was increased.



While BYI reported an "in-line" EPS number of $0.53, we can't really say that they "met expectations."  If not for the 21% decrease in SG&A, BYI would have missed EPS by a mile.  Higher FY2010 guidance and a bullish outlook is good enough to forgive a weak quarter of equipment sales.


While we were disappointed in the FQ3 top-line, our thesis on BYI never focused on this quarter.  It's about owning the cheapest gaming equipment manufacturer into what we believe will be a huge cyclical rebound in replacements and abundant new market opportunities spurred by governments' need to fund ballooning fiscal deficits.


Despite an in-line EPS number, Bally's $196MM revenue missed our revenue estimate as well as the street's by $8MM and $10MM, respectively.  Excluding the casino operations, which no one really cares about anyway, the miss was driven by weaker gaming equipment sales.  BYI reported $62MM of equipment sales vs our $70MM estimate and $77MM consensus estimate.  The $8MM difference between our estimate and the actual number was evenly split on lower new gaming device revenues and other equipment sales.  New units sales were 3.5% below our estimated 4,079 number and ASP's were 3.6% below our estimated sales price of $14.6k.  BYI missed our North American shipment estimate by 300 units but partially made up the miss by higher international shipments.


Gaming operations was a touch better than Street expectations and a little below our estimate - the September quarter is typically seasonally weak.  We were amused when Haddrill called out Ramesh for sandbagging the systems numbers, because we think that's exactly what he did last quarter when he basically guided to a systems number higher than $47MM reported in June but lower than the mid-50's run rate.  We think that BYI's decision to guide to system's revenue for the year was a smart move since no one really knows how to model that business and therefore the street and buyside continually undervalue it. 


All the detail aside, SG&A really saved the day. While some of the savings were clearly due to lower litigation and auditing spend, we think the vast majority was driven by salary cuts.  BYI did say that SG&A would be higher next quarter.  Of course, so will revenues.  We are quite bullish on FQ2 and think Street estimates need to come up. 





As expected, BYI's outlook on 2010 and beyond was very bullish, and for good reason:

  • Operators signaling willingness to open their wallets a little wider in calendar 2010
  • Opportunities to enter numerous new jurisdictions domestically and internationally beyond FY2010
  • Exciting new games to be previewed at G2E
  • New platform for system gaining traction and the increasing likelihood of being able to install their iVIEW DM "bridge" technology onto IGT and WMS devices
  • Elimination of most of the IGT litigation and getting all the accounting issues behind them





  • "Pleased to report a very strong start to 2010"
  • 9th quarter in the row of meeting or exceeding analyst estimates
  • Believe that shipshare in NA was in the low 20's%
  • Cost of services are now included in cost of sales for systems business. Maintenance revenues increased 10% to $13.5MM
  • SG&A decreased 18% y-o-y as a result of lower payroll, incentive comp, and lower legal and auditing fees.  Expect SG&A to increase sequentially but to be lower y-o-y due to the successful resolution of legal and auditing issues
  • Since Sept 20th they repurchased 200k shares around $36
  • No Trial date set for the anti-trust case
  • Shipped 2,418 units to NA customers. All but 87 were replacement sales, given the anemic number of new openings.
    • Didn't recognize any City Center shipments
  • Some competitors are discounting
  • Majority of NA shipments were video, and video continues to perform well
  • Think that they can maintain margin in the high 40's for game sales and that 50% is achievable
  • Gaming operations:
    • Increased premium games placed and got higher win per days
    • Just launched Digital Towers which are performing more than 2x house average
    • Commencing in the December quarter, new spinning reel games coming out
    • Backlog is the strongest they've seen in a while
  • Have a new cabinet to replace a 40-50k footprint of aging mechanical spinning reel games
  • Excited about G2E game launches. 188 unique game titles worldwide.  They think that they will blow you away with their showing
    • 90% of what they show will be available by the Spring
    • New Alpha platform - Alpha2, very strong feedback should allow them to compete effectively at G2E
    • Reel Image (transmissive technology) launching
  • Have seen more customer interest in their products over the last few months
  • Domestically focused on all coming gaming markets
  • Re-entering Australia over the next few weeks
  • Systems margin was lower than normal range because of the higher percentage of iVIEW and other hardware and higher services for systems installations.  Expect systems margins to get back to normal
  • Systems revenue should be $220-230MM with maintenance to be $58-62MM (already guided to this last Q)
  • Referred to the systems install at Galaxy this September
  • In Mexico they have 70 systems sites up and running.  The migration to Class III will present a great opportunity for them
  • Pipeline of opportunities allows them to remain bullish on the outlook for their business
  • Running a successful trial of iVIEW DM at Pechanga on 400 units and will grow to 1,200 units
  • The backwards compatibility advantage of their systems is an advantage
    • Basically you can run their "server applications" on legacy machines... so if casinos are strapped they don't need to buy new games to get new apps
  • Based on the solid start to the year, BYI raised the low end of their guidance by 5 cents (better margins and visibility)
  • When the economy / environment improves they should be able to grow EPS meaningfully
  • They have the highest margins in the industry
  • Their R&D effort is very productive, released 2x as many games this year
  • Continue to capitalize on their international growth opportunity


  • Pricing/discounting?
    • They were referring to a small competitor
  • Booking Aria?
    • I don't know why Bill thinks that companies booked CC in the quarter.  We met with CC slot management in mid-Sept and there were only 800 games on the floor
  • iVIEW DM at Pechanga, how important is this?
    • We wrote a note on this deployment because the release implicitly implies that they will put iVIEW DM on IGT & WMS machines... this is very material.  IGT will tell you that if you open their boxes the warranty lapses. We'll see what really happens though
    • 450 games now, 600 games in the next week then 1,200 in early 2010
  • Will all the iVIEW DMs go on just BYI, IGT, Konami machines?
    • Unclear.... they've already tested it. Expect to get the green light from IGT/ WMS "soon"
  • Tax rate for the year?
    • 36%
  • Mix of hardware and software in systems?
    • Still think that systems margins will be in the low 70's for the year
    • Also reclassified how they account from services/installation expense from SG&A to cost of systems sales.  They had $1.2MM of this cost imbedded in 1Q09 
  • What drove the strong international unit sales
    • 15% of the sales were to Mexico (Class II) -first for sale units into Mexico
    • Asia had a good quarter
    • South Africa kicked off
  • Mexico
    • Don't expect participation to get whacked there
    • They used to sell the games at very low margin and then also make a small participation fee... let's say $10-15/day
  • When will they recognize all that systems implementations that occurred in September?
    • Most was booked in the September quarter, some will be spread over 12 months, others fall into next quarter in line with "go-lives"

Q4 Retail Themes & Key Ideas Call: Tomorrow at 11am


Conference Call Friday October 30th. 11 AM EDT

The Research Edge Retail team, led by Brian McGough, will host a 4Q Retail Themes and Key Ideas call and web presentation along with CEO and Macro strategist Keith McCullough to review key findings on Friday, October 30th 2009.

From Dollar General to NIKE, Inc, the retail sector sits in the crosshairs of the current shifting economy. We'll cover actionable investment ideas over multiple durations. On the Q&A, we'll not only address all questions related to our content, but will also be available to comment on any retail tickers from a TRADE/TREND/TAIL risk management perspective.

The call will be available to subscribers and trialers of Research Edge Retail, and will include:

  • Macro impacts on global consumption patterns
  • Demand and supply interplays regionally & globally
  • The margin cycle in global Retail
  • Shifting Private Equity dynamics, and their role in structural change
  • Retail winners and losers from the Bankers Bonanza
  • Retail names and our Bombed Out Buck

Subscribers please contact to request call and presentation access. 

If you are a qualified institutional investor not currently subscribing to the Retail product, please reply or email our Head of Sales Jen Kane at to request a trial.





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